Still more on Waxman-Markey

Now to Chris’ comment:

If you read my last post, in response to Anonymous’ comment, the answer to Chris’ comment (hidden in the humidity post) is related. Yes, the best way to reduce carbon usage is to increase the cost of carbon. But beyond simply increasing the cost, it is also beneficial to increase the cost relative to non-carbon alternatives. Without getting back into the morass from the last post, a cap and trade program that doesn’t rebate the allowance value to consumers in any direct way does both, but even a cap and trade program that does rebate the allowance value directly as a function of energy usage can do the latter – it can raise the cost of carbon-based energy relative to non-carbon alternatives, even if it doesn’t raise the overall cost of using energy.

Now, with respect to the CBO study to which you refer, a couple of points.

First, I don’t see $28/year anywhere in that study, nor is that a figure with which I’m familiar, having spent more time with this document in the past week than I care to remember. It does say that the expected price of an allowance in 2020 is $28. Is that what you’re talking about? For those who don’t have an intuitive idea of what a ton of carbon dioxide should cost, I’d say that’s a low but not wholly insignificant cost, relative to the kind of stimulating figure we should be looking for. It’s at the bottom of the useful range.

Second, CBO estimates the average cost per household in 2020 to be $175. That figure is NOT the cost of the allowance value necessary to meet an average household’s share of compliance obligations under a cap and trade program – that’s $890, a goodly sum. Rather, $175 is the net cost, once the allocation of allowance value and certain other benefits are factored in. Again, not to belabor the point, but the full impact of that $890 would be felt in the policy’s environmental impact if the allocation of allowance value were done on the basis of something other than greenhouse gas emissions or energy use – say, for example, if it were simply a flat tax credit, or as one particularly smart and creative GOP staffer proposed to me the other day, a payroll tax reduction. But that is the kind of winners and losers creating formula that the US Congress can’t stomach. (I mean winners and losers among ordinary taxpayers. Of course, the US Congress has an insatiable appetite for making winners and losers out of special interests and the general public.) If the allowance value is rebated based on volume of energy consumed, not greenhouse gas intensity, you get some of the environmental benefit – ie, the environmental benefit that flows from the comparative advantage that carbon-free sources of energy have over carbon ones, but not that which would flow from an overall increase in energy costs. And finally, if it’s rebated based only on greenhouse gas intensity, you get very little environmental benefit at all. The cap and trade scheme in Waxman-Markey has elements of all three.

Third, the CBO analysis goes deeper into that $175 figure and divides it up by income quintile. Bottom line: the poorest fifth of households see a net benefit of $40, and the second poorest – the lower middle class – see a net cost of only $40. In other words, the burden of the program falls on those most able to pay. That’s good. And by the way, the CBO study does not include all the benefits of the program; it leaves out the simulative effect of the growth of good new clean industries, and the avoided costs of adapting to climate change. Both are significant.

Fourth, Chris, you say “even out to dates as far as 2020,” but 2020 is just the beginning. The best thing about the cap and trade scheme is that it plots a trajectory all the way out to 2050. Don’t judge this policy by our absolute emissions level in 2020 – judge it by the rate at which we are reducing emissions year over year in 2020, and beyond.

Finally, your question about why cap and trade over tax. Two things. One, a tax is no simpler than a cap. It just seems like it might be because the cap has gotten so complex. But the same people who demanded relief from the cap would have done so with the tax, and you’d be left with something just as complicated. Two, the most important way in which a cap differs from a tax is that those who get allowances freely allocated to them still have a compliance obligation. That is a crucial point. If a coal plant operator is exempted from paying a tax, they have no incentive to abate. But if that same operator instead gets allowances freely allocated in an amount equal to their compliance obligation under a cap and trade scheme, the incentive to abate remains. From the perspective of a shareholder, no difference. From the perspective of a Bangladeshi, very important difference.